Foreclosures are likely to drop if one investment bank’s program works out.
Optional-Payment Adjustable Rate Mortgages (Option ARMs) are considered one of the riskiest mortgages available to homeowners who have trouble meeting their monthly payments. The problem? You can only pay the interest for a certain period, which is very enticing unless you mind getting caught with interest payments three times higher after lower-interest months.
The Federal Reserve warns the public that such an arrangement can lead to negative amortization. In one payment option, you are responsible for additional interest aside from the monthly interest payments you make along with the principal. Your total mortgage then balloons to an amount that is higher than what you borrowed when term resetting begins.
In a 2006 report by Businessweek, the magazine investigated the dangers of Option ARMs and predicted it would have devastating effects on our economy within two years. Back then, mortgage banks offering the Option ARMS were hooked on marketing a product that was undeniably tempting for those who couldn’t make ends meet.
Though there were already signs of the eventual property slump, the report revealed the lending spree would come at a huge cost to each borrower’s financial future. Make no mistake that they were victims; but they all knew too well what kind of mortgage they were getting into. It was just plain bad business.
Eliminating a questionable option
In an effort to restructure the mortgage portfolio, JPMorgan Chase announced last week that it is set to get rid of Option ARMs following a mortgage relief program. After acquiring Washington Mutual, Chase responded to the market crisis by eliminating the shady option that plunged WaMu into bankruptcy. Is this an act of consternation to save those impulsive borrowers? Not exactly.
Homes have lost their equity, and unless median prices start spiking back, the economy will still be in the doldrums. Chase’s aim in restructuring is to make mortgages affordable amidst delinquencies. It needs to trim down foreclosures and recover the cost of its purchase of WaMu. So who needs the federal bailout plan when the market can take measures of its own?
Certainly, it’ll still be Fannie and Freddie. The government has to put its skin in the game to get the ball rolling and to “artificially” raise house prices. Otherwise, it would remain trapped in this mess.